Keeping Software Outsourcing costs low after IR35 enforcement

Although COVID-19 has given us a year’s reprieve, from April 2021 HMRC starts to enforce IR35: the new legislation intended to capture more revenue from self-employed workers. From that date, many UK software development contractors who meet the following criteria, must be captured under their clients’ PAYE scheme:

• a worker who provides their services through their intermediary
• a client who receives services from a worker through their intermediary
• an agency providing workers’ services through their intermediary

Generally speaking…

The rules apply if a worker provides their services to a client through an intermediary, but would be classed as an employee if they were contracted directly.

https://www.gov.uk/guidance/understanding-off-payroll-working-ir35

This is likely to have far-reaching consequences for many UK companies who rely on contractors to temporarily boost their software development capacity. Using contractors is a good way to get quality and commitment very quickly because they don’t have sick or holiday entitlement, and they will challenge and stretch their line managers more often than employees. From a contractor’s perspective, tax efficiency and freedom are the main reasons why many IT professionals prefer to be self-employed but this is set to change with the introduction of IR35. The reality is that a contract length starts at three months but is often very likely to extend to two or even three years, which then starts to look very much like ongoing employment, at least to HMRC.

For IT contractors living in the UK and governed by HMRC regulations, a possible solution could be to find a job abroad. However, UK businesses will still need to outsource for medium to long-term software development capacity, which will become more costly in the UK, so the natural way forward is to use offshore manpower.